RAC program requires major changes for improved transparency

Congress is paying increased attention to outpatient (observation) and inpatient status determinations for hospitalized Medicare beneficiaries and to the Recovery Audit program charged with enforcement of such determinations. Recovery auditors, commonly referred to as recovery audit contractors, have returned an estimated $5.4 billion to the Medicare trust funds (PDF) in improper payments, yet hospitals and providers have argued that the contingency-fee-based RAC program is fraught with inaccurate auditing and myriad inefficiencies, wasting Medicare dollars.

Such opposing views reflect a major issue plaguing the RAC program: lack of transparency in data reporting. At a May 2014 House Ways and Means Health Subcommittee hearing on “Current Issues in the Medicare Program,” it was clear that the CMS, RACs and hospitals all use different figures to make their claims on appeals accuracy and financial recoupment. One year later, these problems were still apparent at a similar May 20, 2015 Senate Special Committee on Aging hearing. As a practicing physician and researcher who testified at the former hearing and watched the latter, I was struck by the reality that data that would never pass muster in the research world was being used by the CMS and by RACs to shape federal policy.

In the complex audit and appeals process, when a hospital's Medicare claim is audited, the recovery auditor either agrees with the claim or issues a determination of “improper payment.” If the auditor alleges improper payment, the hospital may contest this decision either by entering into the pre-appeals discussion period or by entering into Level 1 of the appeals process. Both discussion and appeals involve a similar amount of labor and cost for the hospital. If a hospital does not contest the auditor's decision, under some circumstances the hospital can rebill Medicare Part B to recoup some payment for the services delivered.

As an example of the need for data transparency, a recent study combining more than 100,000 Medicare encounters and associated Complex Part A audit and appeals data from Johns Hopkins Hospital, University of Utah Hospital and University of Wisconsin Hospital found that 33% of RAC improper payment determinations contested and won by the three hospitals occurred in the discussion period. Yet decisions in favor of a hospital in discussion do not appear in federal reports of RAC accuracy, as discussion is technically not part of the formal appeals process. In addition, the CMS uses flawed methodology to determine appeals success (PDF), such that “… a single claim … denied at the first and second levels (of appeals) and then overturned at the third level would result in a 33% overturn rate—instead of 100%”. Therefore, the 9% hospital appeals success rate cited by CMS Deputy Administrator and Director Sean Cavanaugh at the May 20 Senate Aging Committee hearing markedly underestimates the actual RAC error rate. Both lawmakers (see H.R. 2156) and the CMS (PDF) have developed measures to penalize auditors that have overturn rates exceeding 10%. Although such efforts are laudable, these methodological concerns make such measures less meaningful in evaluating auditor performance and ensuring accountability.

And what exactly are “improper payments?” At the three study hospitals, the average time in appeals was 555 days, prompting the hospitals to concede or withdraw cases, causing these dollars to be logged as “improper payments.” The current appeals backlog incited CMS to issue a “68 cents on the dollar” settlement if a hospital agreed to settle all outstanding appeals. Although CMS encouraged hospitals to accept the settlement, these reconciled cases were also considered “improper payments.” Currently, time spent in appeals, a likely reason behind many “improper payments,” does not appear in federal reports.

Current practices—such as omitting the discussion period in measures of RAC accuracy—beg for improved transparency in data reporting. Congress and the CMS must mandate that the RACs accurately report existing data, including:

Overturns in the discussion period

Use of final appeals decisions only to calculate appeals success rates

Percentage of claims audited and appealed each year by type of audit (Complex Part A, Complex Part B, semi-automated, and automated)

Fortunately, amendments to the bill discussed by the Senate Finance Committee on June 3, 2015, contain many of such transparency measures. Surveillance and auditing is necessary to maintaining integrity in the Medicare program. Equipped with accurate data, Congress and Medicare will know exactly how to fix the recovery audit program, the most important piece to solving the hospital observation care problem.

Dr. Ann Sheehy is an associate professor at the University of Wisconsin Department of Medicine and division head of hospital medicine.